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Before 2008, some of them tell Financial Advisor, they took the prospectus on faith.

After all, every fund company is at least as heavily regulated as any RIA out there, so you would think someone at the SEC was going through all the paperwork and checking it against actual portfolio holdings.

Apparently not. Managers have been investing outside their formal mandates for years now -- whether to chase performance or simply out of inertia isn't clear -- and nobody's blown the whistle yet.

If anything, last year's Supreme Court ruling in favor of Janus gave a green light to "misleading" prospectus statements on the technicality that the nominal fund manager and the people actually investing the assets were legally different entities.

But in that scenario, who is liable if the prospectus doesn't match the portfolio?

The fund's advisor picks the stocks, theoretically according to the investment policy statement.

The fund's manager writes the statement.

And the managers do not seem too interested in holding their advisors to their fiduciary duties, so the buck passes to the people who recommend the funds to retail clients -- to the street-level advisor.

Comments (4)

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Is the issue that advisors believe indexes are homogenous? In excel it takes about a miliisecond to verify via returns based style analysis (if done correctly).

SEC reports won't help the advisor as the fund only reports holdings as of the report data. The day before they could have been 100% naked Greek debt.

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I think that's part of it, but I get the sense that some people are looking at the style grid as a set of discrete investment universe with no overlap -- almost like separate asset classes. Cross too far on the grid, and suddenly you're off "mandate."

I'm probably simplifying their concerns, but I've gotten that a fair amount over the last few years as various stocks and sectors "fail to behave" in their mandated style box. Maybe if we're lucky the talented Mr Surz will weigh in.

As for your second point, that's the most streamlined and powerful argument for a model-only or "overlay" approach I've seen yet.

ScottMartin ,
February 17, 2012

+0

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I think it is funny that Ron Surz has been beating this drum for almost 20 years. Styles should not overlap - it was the style pallette edict Dr. Sharpe set up in the late 1980s.

His solution PiPods is cheap and very, very good.

brentb843 ,
February 17, 2012

+1

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Thanks Brent. For readers who have the holdings I also provide Style Scan at http://www.ppca-inc.com/StyleS...ation.aspx Try it. You should learn a lot, including the differences between a Russell style definition & my style definitions. Because Russell uses price/book their classifications of troubled banks is all messed up -- book values are grossly overstated.

a guest ,
February 18, 2012

+1

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